Archive for inflation

The Dow’s All-Time High

Photos_NewYork1_032The Dow Jones Industrials just closed above 17,000 for the first time ever. While they are celebrating the 4th of July, Americans can rejoice in the good fortune the stock market is giving them.

But wait, what’s actually driving the stock market to reach its highest level of all time?

Since its high in 2000, the Dow is up 45%. Over the same period the CPI is up 40%. Nearly all of the gain in the stock market is just because of prices going up, not because of real economic growth. In fact, if you factored inflation out of your stock returns over the past 14 years, you earned a miserly 0.2% per year.

There’s lots to celebrate this 4th of July weekend, but stocks for the long run is not one of them.

(Originally posted at Mises Canada.)

Oil, Gas, Inflation, and Cheap Money

-Boom_Town_ballyhoo-_-_sponsored_by_the_A&R_Department_-_at_the_Post_Gym_LCCN98513372.tifToday’s Mises Daily article covered the impact of government subsidies and infrastructure on the fracking boom. But there is another big player in the oil and gas boom that is routinely ignored by “energy independence” enthusiasts who claim the sky is the limit for fracking: cheap money from the central bank.

Energy companies are employing massive debt schemes to finance exploration and initiation of extraction plans. According to Bloomberg

Quicksilver acknowledges the company is over-leveraged, said David Erdman, a spokesman for Quicksilver. The company’s interest expense equaled almost 45 percent of revenue in the first quarter. “We have taken concrete measures to reduce debt,” he said.

Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells.

“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”

Chauhan wrote a report last year titled “The Other Tale of Shale” that showed interest expenses are gobbling up a growing share of revenue at 35 companies he studied. Interest expense for the 61 companies examined by Bloomberg totalled almost $2 billion in the first quarter, 4.1 percent of revenue, up from 2.3 percent four years ago.

Yes, “interest rates are rising,” but they’re still extremely low in the big scheme of things, thanks to the unending new money flowing from central banks. Even with rising rates, however, fracking operations, in order to remain viable, will need to keep borrowing since, as it turns out,  fracking is extremely expensive. Bloomberg explains:

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Meats and Poultry at Record Prices

300px-FoodMeatThe Bureau of Labor Statistics’ index of meats, poultry, fish and eggs just hit an all time high. Nor are these higher prices confined to just food items. Consumer prices across the board are registering their sharpest price increases in over15 months. Inflation is accelerating on a variety of goods, from airline fares to vegetables.

This must be good news to the Fed, as it has unleashed the most expansionary monetary policy of all time over the past five years. The explicit goal of all the QE programs was to prevent prices from falling.

According to USA Today, it’s not just the Fed that should be happy with higher prices. Consumers too should be upbeat about the rising cost of living:

The recent pick-up in consumer prices is generally considered good news for the economy because annual inflation was well below the Federal Reserve’s 2% target last year. Low inflation reflects a weak economy and can lead to deflation, or falling wages and prices, which often foreshadows recession.

Never mind that low inflation would be the norm if the Fed wasn’t constantly inflating the money supply. And never mind that deflation is beneficial as it means we can buy more goods with the same amount of money (who doesn’t love sale season?). We’ll also overlook the fact that there are many workers who can’t get a job because minimum wage bars them from lowering their wages to a competitive level. Deflation in wages would vastly improve these peoples’ lives by getting them off the dole.

Lastly, while the Fed may think rising prices are a boon to the economy, perhaps Janet Yellen should trying telling that to the masses of unemployed Americans. Over 10 million Americans are officially unemployed today, and millions of others are discouraged and have given up all hope of finding a job. Rising prices for the food they buy is anything but positive news for this sizable group.

(Originally posted at Mises Canada.)

Mises Daily: There is No Tradeoff Between Inflation and Unemployment

6771There is No Tradeoff Between Inflation and Unemployment by Chris Casey

Even mainstream empirical data shows that the Phillips Curve is wrong and that inflation does not cure unemployment. More importantly, Austrian economics has long shown that, regardless of how you slice and dice the historical data, inflation causes malinvestment, booms, and busts, thus increasing unemployment.

How Inflation Helps Keep the Rich Up and the Poor Down

6767 (1)Guido Hülsmann writes in today’s Mises Daily:

If there is any truth to the socialist caricature of capitalism — an economic system that exploits the poor to the benefit of the rich — then this caricature holds true for a capitalist system strangulated by inflation. The relentless influx of paper money makes the wealthy and powerful richer and more powerful than they would be if they depended exclusively on the voluntary support of their fellow citizens. And because it shields the political and economic establishment of the country from the competition emanating from the rest of society, inflation puts a brake on social mobility. The rich stay rich (longer) and the poor stay poor (longer) than they would in a free society.

Video: Mark Thornton explains “Silver Money and Inflation”

Mark Thornton explains how silver money keeps inflation in check.

How Inflation Picks Your Pocket

Man being pickpocketedDan Sanchez writes in today’s Mises Daily

The IRS, after all, is like a mugger. You see the government demanding the money and taking it (unless, of course, you’re fooled by Milton Friedman’s withholding scheme). You see the mugger’s knife, and so you’re more likely to try to defend yourself from him.

The Federal Reserve (which does the inflating), on the other hand, is more like a pickpocket. Its taxation is far more insidious. Unless you read articles like this one, you don’t even see its hand in your pocket.

Four Ways to Value the Stock Market

Philippine-stock-market-boardWith the Dow Jones closing above 16,600 for the first time ever last week, investors are overjoyed by the signal this sends. Apparently all is well in the economy, and those pesky threats of unemployment and sluggish income growth are figments of your imagination.

Over at Mises Canada today, my daily article shows how well the stock market has been performing in something other than money. It turns out its unsettling. Since 2000, the stock market has just barely maintained its value in inflation-adjusted terms, this despite being over 5000 points higher today.

In terms of gold the collapse is even more pronounced. It takes nearly 75% fewer gold ounces to buy a “unit” of the Dow today than it did 14 years ago!

That´s not exactly what I think stock market cheerleaders have in mind when they talk about “investing for the long run.”

Read more here.

All Videos from ‘Inflation: Causes, Consequences, and Cure’

From the April 11 Seminar: Inflation: Causes, Consequences, and Cure. A seminar for High School and College Students

(Six Videos)

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Video: ‘What is Money?’ with Mark Thornton

Presented at “Inflation: Causes, Consequences, and Cure”: a free seminar for high school and college students. Hosted at the Mises Institute in Auburn, Alabama, on 11 April 2014.

Photos from Today’s Inflation Seminar

Inflation: Causes, Consequences, and Cure. A seminar for High School and College Students

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Tomorrow: An Inflation Seminar for High School and College Students

unnamedOnline and at The Mises Institute:
Inflation: Causes, Consequences, and Cure. A seminar for High School and College Students

Register  here. 

One of the easiest ways for the state to take our money is to inflate away the value of the money we already hold. When governments and central banks work together to create more paper money, the state’s friends and allies benefit while everyone else who holds the now-devalued currency suffers.

In this new seminar for college and high school students from the Mises Institute, our scholars will help students understand the state’s motivation to inflate the currency while examining the many effects of this backdoor method of taxation.

From hyperinflation, to disruption of entrepreneurial planning, to income inequality and to wealth destruction, students will leave this seminar with a detailed and timely knowledge of the way that inflation is being used worldwide to enrich governments and impoverish private citizens.

Attendance is open to homeschool, public, or private high school students and their chaperones or teachers, and college students. Through the generosity of one of our donors this seminar is free to everyone. To attend the live sessions, at the Mises Institute in Auburn, Alabama, fill out the registration form at the bottom of this page. In addition, all of the sessions will be broadcast live andcan be viewed either from the homepage of Mises.org or through the Mises Academy on the day of the event.  Special thanks to an anonymous donor for making this event possible.

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Audio: Thornton Explains the Crack-Up Boom

Interviewed by host Alan Butler, Mark Thornton explains why the Crack-Up Boom phase of a fiat money collapse is one of the scariest economic phenomena in human history.

Listen here. 

Why Keynesian Economists Don’t Understand Inflation

putting the coinsFrank Hollenbeck writes in today’s Mises Daily

Unnoticed by many mainstream economists is the fact that we are actually having the inflation everyone was so worried about back in 2009. It is simply showing up in asset prices instead of consumer prices. For some reason we consider higher food prices as bad and something to be avoided, while higher home prices are viewed as a good thing and something to be cheered. But they are both a reduction of your purchasing power. Today, home prices outpace wage growth significantly in many markets, and remain at high bubble-like levels, pricing homes out of reach of many young couples. Their incomes have less purchasing power: the money can buy less of a house, just like it can buy less of a hamburger.

By setting an inflation target, the FED did not let deflation run its course after the crash of 2008, and that was a big mistake. During the 2001-2007 boom years, housing prices shot up. This speculative bubble led to massive overbuilding of both private homes and commercial properties.

Deflating the Deflation Myth

Burst your bubbleChris Casey writes in today’s Mises Daily

If deflation does not cause recessions (or depressions as they were known prior to World War II), what does? And why was it so prominently featured during the Great Depression? According to economists of the Austrian School of economics, recessions share the same source: artificial inflation of the money supply. The ensuing “malinvestment” caused by synthetically lowered interest rates is revealed when interest rates resort to their natural level as determined by the supply and demand of savings.

In the resultant recession, if fractional-reserve-based loans are defaulted or repaid, if a central bank contracts the money supply, and/or if the demand for money rises significantly, deflation may occur. More frequently, however, as central bankers frantically expand the money supply at the onset of a recession, inflation (or at least no deflation) will be experienced. So deflation, a sometime symptom, has been unjustly maligned as a recessionary source.

Brazil’s Slow Default

After flying high for several years, Brazil’s luck is quickly running out. Citing bad economic management and one-off accounting tricks that flattered its public finances, credit rating agency Standard & Poors has downgraded the country’s debt to BBB-, just one step above junk.

With this downgrade comes investor fears that the money they have lent the South American government will not be repaid. The reality of the situation is that this is not a new phenomenon.

There are always two ways to default: the explicit and implicit way. Credit rating agencies are concerned with explicit defaults. When a country doesn’t pay interest or principal it is evident that investors have lost. A bond rating informs investors what the perceived risk is that such an unfortunate event will occur.

Explicit defaults are rare compared to their implicit counterparts. Countries often run high inflation rates to reduce the payments on their debts. Money is borrowed at a set interest rate, and by inflating the currency (which the country controls through its central bank) the real cost of repaying this debt is reduced. The inflating country gets a free lunch of sorts, while investors are left with lower inflation-adjusted returns. Credit ratings are often meaningless for dealing with this type of default.

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High price inflation has plagued the Brazilian economy throughout the past decade. Consumers most constantly grapple with increasing prices every year, but no less difficult is the life of an investor in Brazilian government bonds. Unsure of what the rate of inflation will be after they make their “investment”, these individuals are at the mercy of the central bank as it controls the money supply to suit its needs.

Many commentators will point to Brazil’s high economic growth as the reason for its price inflation. These people would do well to just consider some simple statistics from the central bank.

brazil inflation 2

Money supply growth in Brazil has averaged nearly 20% per year for the past decade, and grew by as much as 40% as recently as 2009. That’s a lot of new money sloshing around looking for a place to be put to good use. As it is spent it has pushed prices up, and reduced the returns that investors in Brazil have earned.

The threat of a default by the Brazilian government might look dire, but it would really just be making explicit the policy the country has been pursuing for many years now. If it an explicit default meant price stability in the aftermath, maybe it would be a good idea to just get the pain over with in one fell swoop.

(Originally posted at Mises Canada.)

Ben Bernanke Gets His Reward

6700Christopher Westley writes in today’s Mises Daily: 

“Bernanke Enjoys the ‘Fruits of the Free Market,’” or so we’re told in a Reuters headlinefrom March 4 about the former Fed chairman’s 40-minute speech in Abu Dhabi for which he received, ahem, $250,000. In the Reuters author’s defense, he was only quoting a DC lobbyist who was defending the amount, and added, Bernanke “will personally experience supply and demand.”

Well, yes, it’s just supply and demand and all that. No big deal and if you don’t like it, you must have something against markets. Still, it would be nice (and a bigger deal) if these reporters would quote someone outside of the accepted intellectual class of the Boswash corridor so compromised by being among the primary beneficiaries of all the new money Chairman Ben and his comrades created, ex nihilo, when he wasn’t shooting baskets in the Marriner Eccles building. If they did, they might hear some healthy skepticism about these events in which top officials cash in on their “public service” via contacts with the very industries they benefited while in office.

How the Artificial Boom of 1914-1929 Caused the Great Depression

732px-Unemployed_men_queued_outside_a_depression_soup_kitchen_opened_in_Chicago_by_Al_Capone,_02-1931_-_NARA_-_541927by David Stockman

From David Stockman’s Contra CornerRemarks to the Committee For The Republic, Washington DC, February 2014 (Part 3 in a 6-Part Series) Go to Part 1.

In this setting, Bubbles Ben 1.0  (New York Fed Governor Benjamin Strong) stormed in with a rescue plan that will sound familiar to contemporary ears. By means of his bond buying campaigns he sought to drive-down interest rates in New York relative to London, thereby encouraging British creditors to keep their money in higher yielding sterling rather than converting their claims to gold or dollars.

The British economy was thus given an option to keep rolling-over its debts and to continue living beyond its means. For a few years these proto-Keynesian “Lords of Finance” —- principally Ben Strong of the Fed and Montague Norman of the BOE—-managed to kick the can down the road.

But after the Credit Anstalt crisis in spring 1931, when creditors of shaky banks in central Europe demanded gold, England’s precarious mountain of sterling debts came into the cross-hairs.  In short order, the money printing scheme of Bubbles Ben 1.0 designed to keep the Brits in cheap interest rates and big debts came violently unwound.

In late September a weak British government defaulted on its gold exchange standard duty to convert sterling to gold, causing the French, Dutch and other central banks to absorb massive overnight losses. The global depression then to took another lurch downward.

Inventing  Bubble Finance : The Call Money Market Explosion Before 1929

But central bankers tamper with free market interest rates only at their peril—-so the domestic malinvestments and deformations which flowed from the monetary machinations of Bubbles Ben 1.0 were also monumental.

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The Dogs of Inflation

413px-Petit_Journal_Janvier_25_1914_Loup_&_EnfantKeynesians Again Revive the Phillips Curve Folly

Robert Higgs has provided a most applicable biblical passage that very aptly describes the continuing knee jerk revival of the Keynesian follies during this Fed-Bush-Obama
Great Recession and Great Stagnation
:

“As a dog returneth to his vomit, so a fool returneth to his folly.” Psalm 26:11.

Frank Shostak, in his excellent Mises DailyInflation Does Not Produce Economic Growth,” identifies another culprit, Chicago Federal Reserve Bank’s Charles Evans.

For an in depth critic of the Phillips Curve from an Austrian perspective see Adrian Ravier’s excellent Dynamic Monetary Theory and the Phillips Curve with a Positive Slope.

The “more inflation” argument keeps coming back which is why it continually must be whacked down. Salerno’s and my attempts from two years ago are here  and here. Krugman, Mankiw, Bernanke and Company were then the dogs of more inflation. How soon given hidden rot in labor market news before Ms. Yellen joins them?

How Inflation Destroys the Wealth of Nations

6682Joseph Salerno writes in today’s Mises Daily: 

Brown explains that such monetary disequilibrium is not necessarily manifested in consumer price inflation in the short run. In fact, it is generally the case that the symptoms first appear as rising temperatures on assets markets. Indeed some episodes of severe monetary disequilibrium, such as those that occurred in the U.S. during the 1920s, the 1990s, and the years leading up to the financial crisis of 2007-2008, may well transpire without any discernible perturbations in goods and services markets. Yet overheated asset markets are completely ignored in the Friedmanite view of monetary equilibrium that underlies the Bernanke-Draghi policy of inflation targeting. Brown perceptively argues that one reason for the wholesale neglect of asset price inflation is the positivist approach that is still dominant in academic economics. Speculative fever in asset markets is nearly impossible to quantify or measure and thus does not neatly fit into the kinds of hypotheses that are required for empirical testing.